What is Shareholder Activism? Does It Matter?

Have you ever been invested in a company that just received some bad media attention and wished there was something you could do to set them right? Shareholder activism might just be the most optimal course of action for you.

But what exactly is shareholder activism? What does it mean? Why is it important?

Some investors are happy to simply buy index funds and let the management of those funds pick companies to invest in.

There are, however, recent pushes to allow investors the choice of investing in companies with positive environmental, social, or governance (ESG) motivations behind stock picks.

This subset is often dubbed ESG Investing.

The rise of ESG Investing and Ethical Investing has meant that shareholder activism is becoming more popular.

In some ways, activist shareholders can be some of the more extreme types of investors.

Note though, it’s not easy to label yourself an activist shareholder, or activist investor, because it takes huge sums of money.

We’ll explain what they are and what it means for average investors because it could either be beneficial or steer you towards a decision to exit a particular position.

What Is Shareholder Activism?

Coming back to the question at the start of this article…

Have you ever been invested in a company that just received some bad media attention and wished there was something you could do to set them right?

There are lots of people who have probably been in that position.

This is especially true if it’s a company you know and love, and just want to get them back on the right track.

Fortunately or unfortunately, most strong companies are worth several billion dollars.

And trying to get on the phone with the CEO could prove to take more than a kind word to his secretary.

If you built an investment company specifically for the purpose of being able to influence companies, though, you might have a better chance of making changes.

There are investors like this, and they’re called activist shareholders (or shareholder activists).

A shareholder activist essentially applies Corporate Governance principles in practice.

Where Corporate Governance comprises of a variety of theories, regulations, and red tape, shareholder activists essentially put that in practice and hold companies accountable.

How Do Activist Shareholders Affect Companies?

We all see it – there are corporations around the world that, shall we say, lost their way.

It could have been a social issue that stemmed from poor management decisions about company culture.

Or, more typically, a company’s corporate management has prioritised their own bank accounts above those of their employees, customers, and shareholders.

More recently, environmental and sustainability issues have become a popular motivation for activist investors to get involved, but there are numerous other reasons.

That’s part of the problem with categorising them.

An activist is simply acting upon their desire to enact changes based on their beliefs. And those beliefs could be almost anything.

Activist investors will start by choosing a company and buying enough shares in that company to have a significant stake.

This usually means acquiring a few million shares in a company, or enough to obtain the attention of a company’s board of directors.

Once they have the ear of the board, activist investors then start dictating to them what needs to happen in order to make them go away.

Indeed, this is somewhat similar to the strategy adopted by a firm looking to execute a hostile takeover.

Obviously, most activist investors hope to make a profit from their efforts.

In most cases, they:

• Take a long position in a struggling company,
• Work their activist investor skills, and
• Improve the company’s stock price.

Some activist investors might even take massive short positions in order to keep a company’s stock price from increasing until their demands are met.

Benefits of Shareholder Activism

Some companies spent decades building up a strong reputation for continuous, responsible growth and suddenly stretch too far.

Most long-time investors simply have to stand by and watch companies they used to respect slowly fail.

But activist investors are able to get in where other investors can’t.

Sometimes, an activist getting involved in a company is all it takes for them to realise it’s time for a change.

This can be a huge benefit to faithful investors hoping someone will speak up.

If simply getting the board’s attention isn’t enough, some activist investors will actually collect enough shares to vote in new board members.

New board members mean new ideas and new strategies which could help a company get back on track.

Sometimes, simply hearing a rumour of activist involvement may make a company’s share prices rise.

There are ways for even retail investors to see when activist investors choose their next target.

And it may give investors a reason to purchase more shares in hopes the activist investors will lead to improvements.

A shareholder resolution that’s backed by an activist shareholder is considerably more likely to get through/pass.

Drawbacks of Shareholder Activism

Unfortunately, activist investors are not always successful.

Finance is an extremely complicated field, and there are many different ways that activist involvement can actually backfire on retail investors.

The activist may be entirely wrong in the changes they decide to make, for one thing.

They are only human just like corporate managers, and they are not immune from making mistakes.

If they make too many errors, they may decide to unwind their position and admit defeat, leaving stock prices to fall precipitously and retail investors holding losing positions.

Even when activist investors get involved, it doesn’t mean they will make changes that every investor is interested in.

ExxonMobil, for example, was the target of activist investors.

A combination of companies dating back to John D. Rockefeller’s Standard Oil, ExxonMobil is one of the oldest oil companies in the world.

Activist investment company Engine No. 1 placed three new board members in an effort to reduce the carbon footprint of ExxonMobil.

This goes against the core business of ExxonMobil and could actually reduce profits, which is not exactly a positive for long-time investors.

Shareholder activism that goes wrong can be significantly detrimental to shareholder value.

Who Are Some Notable Activist Shareholders?

Engine No. 1 received media attention based on its very high-profile success at ExxonMobil.

However, there are many companies that operate with similar methods.

Another high-profile activist investor is Bill Ackman, investment manager for his hedge fund, Pershing Square Holdings.

His company has involved itself with companies such as Target Corporation and Wendy’s International to turn those companies around and improve profit potential.

However, he received more attention when he tried to short Herbalife, a multi-level marketing company focused on health supplements.

In his view, Herbalife was crooked, even for a multi-level marketing scheme.

However, long-time rival Carl Icahn took the opposite position to squeeze Ackman out of his short position (aka short squeeze). Ackman abandoned his Herbalife short in 2019.

Carl Icahn is also an activist investor with such names as Time Warner, Apple, Viacom, and eBay in his investing history.

His holdings – at the time of writing – include Occidental Petroleum, Cheniere Energy, and Cloudera Inc among a portfolio of 17 different companies, all with activist investment goals as underlying strategies.

What Companies Are Most Targeted By Activist Shareholders?

It’s important to remember that activist investors are just like any other investment company – they are in business to make a profit.

Although the fundamental objective of the firm – at least in Corporate Finance theory – is to maximise shareholder value, this isn’t necessarily true in practice.

Investors, as shareholders of the company, expect firms to maximise shareholder value.

This applies to institutional investors as well as retail investors.

A firm that fails to do so can end up getting the attention of an activist shareholder and lead them to start an activist campaign.

While they operate mostly in the background, there are a few staples that might point investors to a company on the verge of receiving activist investor attention.

In many countries, large stock purchases must be reported to regulators.

These are publicly available forms that can give investors an idea of activist investor activity.

More subtly, activist investors will look for companies that refuse to see changes in market forces or show recent trends of underperformance.

The same might apply to firms that do not consider or implement feasible, value-maximising shareholder proposals.

And equally, for firms that do not actively practice shareholder engagement or respect shareholder rights.

Take an active stance in reviewing your holdings to find out whether any of the companies might show signs of falling back.

While activist campaigns might actually help, it’s worth being on the lookout for companies with well-known brands as these will be especially helpful for activist goals.

The more well-known the company, the easier it will be to obtain media attention and gather external shareholder support.

What’s Next? – Shareholder Activism

Shareholder activism tends to elicit mixed reactions from retail investors.

This is true even for a large institutional investor – be that someone in private equity or something much more risk-averse like pension funds.

After seeing how they operate and some of the benefits and drawbacks, it’s fairly easy to see why.

Don’t think of activist investment as a strategy you can follow along with but rather as a market force to be aware of as you build your portfolio.

Even though activist investors aren’t secretive once they pick a target, there are still ways to learn to analyse stocks and find out which ones might be in an activist’s crosshairs before it becomes public.

Learn from experts in fundamental analysis in order to find successful, data-driven strategies that can help you better understand activist investors.